Your Finances: Tactics for pending 2013 ‘fiscal cliff’

by Shelton on August 20th, 2012

filed under Finances

In my previous column, I wrote about the fiscal cliff, a term to describe the combination of tax increases and spending cuts due to go into effect in January 2013.

Many economists believe this could lead to a significant slowdown in the economy and maybe even trigger another recession. And lest we forget, the backdrop for all of this is an election year.

There probably will not be any joint action taken by Congress and the president to address these issues until after the election; possibly not until early next year. So, what does that mean for you, the taxpayer and investor?

It means continued uncertainty.

Uncertainty has become the new normal. The challenge is deciding how to deal with the uncertainty.

First, take a step back and consider your goals. Next, you need to develop a plan to achieve those goals. This helps you refocus on objectives rather than being swayed by market fears.

Lets say you have a 401(k) you want to roll over into an IRA. Since this is retirement money, we will assume the goal of this account is to help fund retirement. The planning would include identifying risk tolerance, time horizon and appropriate asset allocation for these funds in relation to the rest of your investable assets.

Understandably, it can be useful to work with a financial adviser to help you through this process.

Once you have gone through these steps and identified how you want to invest your IRA rollover, you may feel you dont want to pull the trigger, because regardless of your planning, you are afraid of the stock market volatility given the looming fiscal cliff.

The answer is dollar cost averaging. This is the strategy of systematically investing your money over time, rather than trying to decide when is the best time to invest one lump sum. Dollar cost averaging is a good strategy to take advantage of inevitable market volatility. So when the stock market is low, you buy more shares at a lower cost, and when the market is high, you buy fewer shares.

There is no one-size-fits-all answer as to how to prepare financially for the fiscal cliff. Instead, think of this as a reminder to discuss your specific situation with your financial planner.

Laura Medigovich is a certified financial planner and vice president for MT Banks Hudson Valley region. The views expressed by the author are her own and not endorsed by MT Bank, MT Securities or their affiliates.